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Amid volatile markets, FM must clean up act

In eras bygone the stockmarket would have been irrelevant to the economy

Union finance minister Arun Jaitley seems to be taking the volatility in the stock and currency markets lightly, saying it is transient and temporary. It’s true nothing lasts forever, but while it does it can cause havoc. What is of concern is Mr Jaitley’s dismissal of the effect volatility has on stockmarkets and the currency as all other economic indicators are strong. His solution is for the government to take more steps to ensure reforms.

There’s no doubt that besides the stock and currency markets, the rest of the economy is intact. But even this must be nurtured by growth, that continues to take place but not at the pace needed in a strong job-generating economy. Prime Minister Narendra Modi’s imaginative schemes to make rural India and the marginalised stand on their feet have to be implemented effectively on the ground. Only then can they create jobs.

The government has no doubt got some stalled projects going, but it’s yet to find a solution to others that are delayed as companies are highly leveraged and banks can’t give further loans. These are the ground realities.

In eras bygone the stockmarket would have been irrelevant to the economy, but given the quality of foreign exchange that is helping to keep the current account deficit and balance of payments position under control, the role of foreign portfolio investors cannot be ignored. If the stockmarkets remain volatile and the rupee weakens, investors are likely to think twice of the risks involved even though economically India remains one of the strongest economies globally. It also remains one of the most attractive markets to invest in.

The CAD and BoP are bolstered by this “hot” money (funds that can flee at the first signs of trouble) of foreign investors and not by exports, which could have provided some stability. Besides gold imports, fuel and commodity prices are down globally, which helps, but is neutralised by a weak rupee to a certain extent. India’s exports have been down nearly nine quarters, and no signs of a pickup are yet in sight. A weakened rupee means expensive imports, which could fuel inflation and cause problems for monetary policy.

Unlike China, India’s export items have huge foreign inputs, which will make Indian exports uncompetitive. So each situation feeds into the other because of the architecture of our economy and the effect of its dynamics. These threaten to negate the advantage India has of not being an export-centric economy. Mr Jaitley, unquestionably well-meaning as he is, will thus have to get his act together, and not be taken in by his own rhetoric.

( Source : deccan chronicle )
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